The Department for Work and Pensions (DWP) has launched a consultation with a view to clarifying pension trustees’ legal obligation to consider environmental, social and governance (ESG) risks.

The consultation, which runs until 16 July 2018 and which is accessible here, proposes some notable changes to requirements regarding trustees’ consideration and reporting of ESG issues – both for defined contribution (DC) and defined benefit (DB) schemes – in particular:

  • For most DB and DC schemes with 100 members or more, by 1 October 2019, their Statement of Investment Principles (SIP) must be updated to take account of financially material considerations (including, but not limited to, ESG and climate change) and their policies regarding the stewardship of their investments. Most DC schemes will also have to update their default strategy to take into account financially material considerations (including ESG and climate change) by that date;
  • From 1 October 2019, when trustees of DB and DC schemes with 100 members or more are next preparing a SIP, they should also prepare a statement on how members’ views are taken into account (the “Member Statement”); and
  • For most schemes of 100 members or more which are ‘pure DC’ or have a mix of DB and DC assets (other than additional voluntary contributions), by 1 October 2019, their SIP must be published, as must the Member Statement. In addition, from 1 October 2020, those schemes must produce and publish an implementation report, setting out how the trustees have acted on the principles in the SIP and the Member Statement, and must inform scheme members of the report’s availability (in annual benefit statements).

In a related development, the House of Commons Environmental Audit Committee (EAC) has published a paper, Greening Finance: embedding sustainability in financial decision making, in which it notes its concern that, whilst The Pensions Regulator published guidance for trust-based schemes regarding the consideration of financially material environmental risks, the Financial Conduct Authority (FCA) has not done the same in respect of contract-based pension schemes. The EAC has called on the FCA to rectify that by the end of 2018. It also recommends that the Government issues guidance clarifying that the Companies Act 2006 already requires companies to disclose climate change risks where they are financially material.


It is recognised that, where risks stemming from ESG issues are determined to be financially material to a scheme, its trustees are obliged to consider them.

Despite that, both the DWP consultation and the EAC’s report highlight continuing confusion among trustees as to the extent to which considering financially material ESG issues is a legal requirement. A great deal of that confusion stems from wording in the Occupational Pension Schemes (Investment) Regulations 2005, which, in particular, infers that trustees are permitted to take no account of social, environmental and ethical considerations, even when the risks involved are financially material. The DWP has proposed some revisions to those regulations to address the issue.

As well as those proposed in the consultation, we expect that the DWP will set out further measures to try and eradicate that confusion, including making reporting on climate-related risks and opportunities mandatory for listed companies and other large asset owners such as pension schemes on a ‘comply or explain’ basis by 2022 (as proposed by the EAC).

The consultation also follows the European Commission’s publication of its sustainable finance action plan in March, which included a pledge to table a legislative proposal to clarify institutional investors’ and asset managers’ duties regarding sustainability by mid-2018. It is another clear sign that industry and political discourse is now moving towards the achievement of long-term sustainability (particularly in the face of growing economic risks presented by climate change) rather than focusing on the maximising of returns over the short term, a goal which has often been confused in the past with trustees’ fiduciary duty to act in their members’ best financial interests.